Many thought that the 2009 and 2010 amendments to the False Claims Act would result in greater recoveries by qui tam relators and the U.S. government. Indeed, both the number of qui tam matters and the amounts recovered have increased markedly since their enactment. Government statistics reflect that 3,490 qui tam actions were filed between 2013 and 2017, up 30 percent from the prior five-year period. Qui tam relators received $393 million in share awards in 2017, up from $205 million in 2008, and the government received $3.7 billion in settlements and judgments in 2017, up from $1.4 billion in 2008. A confluence of recent developments, however, have placed more obstacles in the path of qui tam actions. Three developments in particular—two from the U.S. Court of Appeals for the Third Circuit and one from the U. S. Department of Justice—bear further study.
The Relator Must Establish That the Falsity Was Material
In Universal Health Services v. Escobar, 136 S. Ct. 1989 (2016), the U.S. Supreme Court confirmed that “a misrepresentation about compliance with a statutory, regulatory or contractual requirement must be material to the government’s payment decision in order to be actionable” under the FCA. The court described this as a “demanding” and “rigorous” standard. If the government pays a claim in full “despite its actual knowledge that certain requirements were violated,” that is “very strong evidence” that a requirement is not material.
In Petratos v. Genentech, 855 F.3d 481 (3d Cir. May 1, 2017), the Third Circuit joined many other federal courts in recognizing that Escobar effected a “heightened materiality standard.” Petratos also impliedly recognized (as in Escobar) that a materiality analysis is not “too fact intensive” to resolve on a Rule 12(b) motion.
In Petratos, the relator alleged that his former employer, Genentech, had suppressed data about the side effects of its cancer drug Avastin, causing physicians to certify, allegedly incorrectly, to Medicare that the drug was “reasonable and necessary” for thousands of patients. The Third Circuit concluded that Petratos failed to plead materiality. The court summarily rejected his argument that it must determine materiality exclusively by reference to whether the fraud was material to the intermediaries (the prescribing physicians), who in turn forwarded the false information to the government. Rather, the requisite inquiry is whether the false statement was material to the government’s payment decision.
The court concluded that the complaint failed to plead that the Centers for Medicare and Medicaid Services “consistently refuses to pay” claims like the ones alleged in the complaint; to the contrary, Petratos acknowledged that CMS would consistently reimburse those claims despite having full knowledge that they purportedly did not comply with the law. Indeed, he admitted that, although he had disclosed material, nonpublic evidence about Genentech’s alleged “misinformation” campaign to the Food and Drug Administration and the Department of Justice, the FDA actually approved Avastin for three more indications following those disclosures.
The Government’s Decision Not to Intervene
Petratos also is significant because the Third Circuit suggested, for the first time, that the DOJ’s decision not to intervene in the litigation is relevant to the materiality requirement. Specifically, the court found it significant to its conclusion that the alleged falsity was not material not only that the FDA did not initiate proceedings against Genentech or require it to change Avastin’s label, but also that the DOJ “took no action against Genentech and declined to intervene in this suit.” The court reached this conclusion despite the government’s amicus brief in which it took no position on whether the relator’s complaint should be dismissed. This passage in the Petratos opinion is significant given that the DOJ elects to intervene in so few cases (historically, less than 25 percent). A defendant filing a Rule 12 motion will want to cite the government’s noninvolvement as an indicia that the complaint lacks the requisite indicia of materiality.
Allege and Prove Materiality
Spay v. CVS Caremark, 875 F.3d 746 (3d Cir. Nov. 16, 2017), involved allegations relating to the defendants’ participation in Medicare Part D, a prescription drug benefit program. Unlike other government healthcare programs, Part D is not a “fee-for-service” program. Instead, an insurance company submits a prospective bid and CMS compensates it prospectively for its anticipated costs. Then, at year-end, CMS reconciles the insurer’s actual costs against the amounts paid. The relators alleged that CVS had submitted false information about its costs during the reconciliation process, and had used “dummy prescriber IDs” on its submissions to CMS. The Third Circuit joined six other circuit courts in concluding that a “government knowledge inference” defense (more aptly referred to as the “government acquiescence inference,” would defeat the FCA’s scienter requirement. As the court explained, the government acquiescence inference is a two-prong test whereby the defendant must show that “the government agency knew about the alleged false statement(s), and the defendant knew the government knew.” This defense, if established, shows that the defendant did not knowingly submit a false claim. A “classic example” of this defense is “when the government, with knowledge of the facts underlying an allegedly false claim, authorizes a contractor to make that claim.” Ultimately, the Third Circuit concluded that, although CVS had established the first element of the defense, it did not establish the second element.
However, the court went on to examine whether the pre-2009 version of the FCA contained a “materiality” requirement—an issue left open by Escobar and Cantekin v. University of Pittsburgh, 192 F.3d 402 (3d Cir. 1999). The court concluded that “the FCA has always included a materiality element,” and that the 2009 amendments did not change the definition of “material.” This holding is relevant to future cases in light of the FCA’s 10-year statute of repose, 31 U.S.C. Section 3731(b)(2). Ultimately, the court concluded that the misstatements were “simply not material to the government’s decision to pay the claims” at issue: “The government did not pay for services that were not provided, and the defendants did not receive any compensation for prescriptions that were never given to Medicare recipients.”
The DOJ and Qui Tam Lawsuits
All qui tam complaints are filed under seal and forwarded to the U.S. Attorney’s Office. The DOJ has 60 days (which can be extended) to investigate the allegations and decide whether to intervene in one or more counts of the complaint, decline to intervene, or move to dismiss the relator’s complaint. In a memo issued Jan. 10, Michael Granston, director of the DOJ’s civil fraud section, provided a framework for DOJ attorneys to use when considering whether to dismiss FCA qui tam cases. The memo lists seven nonexhaustive factors, namely: whether the complaint is facially lacking in merit, either due to an inherently defective legal theory or frivolous factual allegations; whether the action duplicates a pre-existing government investigation and adds no useful information to it; whether the relevant government agency has determined that the action threatens to interfere with its policies or the administration of its programs; whether dismissal is necessary to protect the DOJ’s “litigation prerogatives;” whether dismissal will help safeguard classified information; whether the costs of litigation are likely to exceed the expected gain; and whether the relator’s action will frustrate the government’s effort to conduct a proper investigation.
Although the DOJ originally disclaimed that Granston’s remarks (first voiced in November 2017) reflected any change in Department policy, many observers believe that the Granston memo signals that the DOJ will be more aggressive in seeking to dismiss qui tam complaints—if not at the outset, then later in the litigation.
Companies Should Have an Effective Compliance Program in Place
Although each of these developments makes it more difficult for a private plaintiff to successfully bring a qui tam suit, the statistics cited above illustrate that qui tam complaints remain powerful weapons.
In 2011, the National Whistleblower Center published a study in which it found that nearly 90 percent of employees who went on to file a qui tam case initially reported their concerns internally, either to their supervisors or to the company’s compliance department. “Accord,” New England Journal of Medicine, “Special Report: Whistle-Blowers’ Experiences in Fraud Litigation Against Pharmaceutical Companies” (May 13, 2010), (“nearly all” qui tam whistleblowers in a study “first tried to fix matters internally by talking to their superiors, filing an internal complaint or both”). These statistics highlight the importance of educating employees about the FCA, following up on hotline tips, and conducting internal investigations of allegations that may give rise to legal exposure under the FCA or other statutes. Even if the legal pendulum is swinging in favor of corporate defendants in qui tam litigation, a company that lacks a robust compliance program is unnecessarily putting itself—and its shareholders—at risk.
Donna M. Doblick, counsel at Reed Smith, is a member of the firm’s appellate group and is a former clerk to Judge Frank H. Easterbrook of the U.S. Court of Appeals for the Seventh Circuit. She focuses her practice on complex, high-stakes commercial litigation, both at the trial and appellate levels.